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Kuwait Petroleum Corporation (KPC)

Kuwait Petroleum Corporation (KPC). History – Political Disputes 1970s- KPC KPC has struggled Nationalization eventually gave up many subsidiaries KPC suffers from excessive bureaucracy Oil sector devoid of strategy Root cause – fragmented and dysfunctional political system. War. War.

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Kuwait Petroleum Corporation (KPC)

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  1. Kuwait Petroleum Corporation(KPC) History – Political Disputes 1970s- KPC KPC has struggled Nationalization eventually gave up many subsidiaries KPC suffers from excessive bureaucracy Oil sector devoid of strategy Root cause – fragmented and dysfunctional political system
  2. War
  3. War
  4. War
  5. War
  6. War
  7. War
  8. War
  9. War
  10. War
  11. War
  12. War
  13. War
  14. War
  15. War
  16. War
  17. War
  18. War
  19. War
  20. Since 1991 Oil sector been in gridlock Reforms adopted after Iraq invasion and liberation Authority split Unpopular decisions easy to veto – as in Mexico Gov’t unable to focus on reform Six oil ministers since 2000 Entire oil sector gridlocked
  21. Results Performance and strategy hard to measure Efficiency of performance hard to measure Unlike other NOCs, KPC and affiliates produce annual reports In theory, possible Low upstream costs- normal for favorable geology Authors believe performance quite poor
  22. Targets Many missed adjusted targets Pushed capacity of 3,000,000 b/d – 2004 to 2011 1% gas flaring target delayed to 2011 Postponed forth refinery Three major accidents in domestic refineries
  23. Upstream Failed to sustain production Growing difficulty as fields mature “Project Kuwait” – outside investment to expand Stalled politically
  24. Central Arguments First failure of KPC due to Kuwait’s dysfunctional political system Lack of accountability between gov’t and the national assembly KPC is subject to an intrusive and erratic administration Discourage risk taking Merely attacking KPC is a proxy for assembly to challenge the gov’t KPC must follow onerous procurement rules (mirror’s Mexico)
  25. Kuwaiti Law Cumbersome, complex, unpredictability, horribly bureaucratic strategic choices – need four decision steps in Western companies Endure a phalanx of thirty-six decisions in Kuwait In Kuwait, blocked by barriers in Kuwait law and high turnover in oil ministers Difficult to cope with environment
  26. Secondly- Strikingly weak middle-level management Especially true in technical/engineering People given posts for which not knowledge or experience Is a reflection of government-laden system with political interference in promotion Thirdly, high oil prices have masked all three problems Small population and large accumulated reserve funds An alternate strategy – opening the sector to outside companies difficult to adapt
  27. Upstream KPC aware of growing problem Depletion of easy oil and more complex geology Crude is heavier Crude is difficult to extract Growing fraction of water Political gridlock has deterred entry of IOC’s good?
  28. History of KPC Created with old style conversion argument – 1934 IV between Anglo Persian Oil (precursor to BP) and Gulf Oil Included 93 year schedule with no provision for renegotiation KOC had complete managerial control Gathering storm in 1960s 1960: Kuwaiti gov’t created KNPC to operate alongside KOC KNPC built Shuaiba Refinery in 1970, the most modern in the world at the time
  29. General Argument on Participation 1960s – 1972 and next few years 1972: Kuwait 25% equity at $200 bbl Saudi: $351 Abu Dhabi: $580 Qutar: $592 National Assembly demanded even more favorable terms Revision 1973: to 40%; 1974: 60% Mid-1974: 100% - terms never revealed
  30. Problems Large member of separate companies – all state owned Gov’t created KPC as holding overall oil related subs 3 Kuwaiti refineries – three separate owners To absorb into one unit – 10 years KOC uncooperative with intrusive KPC management
  31. National Control Legal instrument for control – “founding law” Gave KPC the mission of being a public corporation (sec. 8.2) KPC’s subsidiaries subject to normal Kuwaiti commercial law “Founding law” tailored to state ownership and more regid Substantial changes increasingly difficult to obtain with existing political gridlock
  32. The War 1990: Iraq invaded Kuwait Oil sector lost many key management personnel Palestinians and Algerians declared persona not grade Liberation from Iraqi not a realistic option because National Assembly interfered in oil sector KPC faced a growing gap in management competence KPC slipped into introspective gridlock since could not decide own strategy and implement it 1998: imposed greater financial controls which encourage KPC to avoid risks
  33. State of Management Early 2000: were three refinery accidents fanning outrage and eroded trust Were symbolic of KPC’s poor performance Reforms were pursued throughout the company From 2004 and formally in force today is called the Strategic Management Model Reforming KPC would require reforming the shareholder, the SPC The oil sector has not really improved due to the political interference
  34. KPC Current Organization
  35. KPC Current Organization Vertical integration requires clear strategy Creates more of a cloud than a scheme with clear lines of authority KPC: empowered only to make recommendations to SPC on personnel and budget SPC: alone given authority to actually set personnel requirements and send budget forward to gov’t and National Assembly Founding law split authority between KPC and SPC – its shareholder
  36. KPC KPC subject to direct governance by SPC KPC are in an uncertain limbo between private and government sectors Energy ministry and National Assembly roles are difficult to parse. Role of National Assembly has no formal role but is required to approve budget and thus creates a large role in spending priorities
  37. KPC’s Performance Kuwait’s oil sector organized around gov’t – controlled budget system KOC receives its capital allocation in budget set by gov’t Refineries are sophisticated but expansion plan for 4th stalled due to expected costs due global construction boom Refinery capacity utilization sound, some distortion due to two large fires but no signs of shortage Production cost Ave cost 1.29 ($ per bbl) in 2011 to 2005/6 $1.47
  38. Operational Cost and Performance Numbers shown are extremely low reflecting relatively easy geology Because easy and low cost, efficiency not high on list of priorities Project Kuwait was to reverse rising costs due to declining efficiency
  39. Labor Related Performance Nepotism is rife, many are employed and promoted well beyond capabilities Kuwaitis receive a degree, return home and placed in management structure a above competent level Process reinforce by political interference which is difficult to reverse Interestingly, managers generally “rise from the ranks” Little lateral movement Problems of incompetence are poised to grow as the less competent younger generations are promoted from within
  40. National Gas Performance A new priority Major field by KOC – March 2006 With Schlumberger expected to supply 1.3 billion cfd And with IOC’s develops deep horizon gas in northern fields Goal of reducing flaring from 5.2% to 1% Gas exploration may be given a higher priority Possibilities are very attractive
  41. Effect of Core Obligations on Performance KPC often seen as a source that can be tapped for local benefits KPP supplies no data as to amount of supply chain from Kuwait companies KPC done little to catalyze broader economic development One exception is preference for Kuwait employment Gov’t statistical bulletin – oil sector accounts for 50% of GDP, accounts for less than 3% of direct employment
  42. Technological Performance How KPC able to general new technologies Headquarters includes an R&D division and work driven by needs of subsidiaries KISR (Kuwait Institute for Scientific Research) Oil sector relies little on KISR Conclusion that performance been poor
  43. KPC’s Strategy Vision – before Iraqi invasion, KPC had clear strategy from Ali Al-Khalifa Conversion of KPC into a major IOC Brief time period – had nationalized its oil industry Newly nationalized company became a basket for all elements Ali Al-Khalifa, now oil minister relied on two Internalize KPC’s activities Contain the fallout of the Iran-Iraq War By 1982, Kuwait crude production fallen to 862 b/d from 2,623,00 b/d
  44. Liberation after 1991 Opportunity to reconsider entire KPC package A 5 year plan emerged to be approved by KPC board Set targets – production 3 mbd to 4 mbd by 2020 Increasing refining capacity to 1 million b/d and 1.5 by 2020 KPC pursues triangular approach to downstream KPC supplies feed stock which brings management skills, technology, and risk management
  45. KPC and Relationship with Government National Assembly – plays to popular desires Kuwait members serve constituencies populated by small number of voters Since 1991, after reformation, ministry’s role less clear Vision – 2020 targets are Kuwait’s official party Rooted in internal discussion – determining crude capacity 2020 – possible call 7mbb, other indication that max – 4 mbd
  46. Project Kuwait Most important decision last 20 years While country in flames, KPC sought and received technical assistance from the IOC’s 5 technical service arguments signed with BP, Chevron, Exxon, Shell, and Total Were willing to do as focus on quid pro quo 1993 extended to allow investment of upstream under terms of Project Kuwait
  47. Project Kuwait Maintaining production levels difficult as depletition more difficult as crude reserves became heavier and more complex Concern over water management in mature fields 4 million b/d of crude by 2020 requires 12 million b/d of water IOC entry might provide benchmark to allow assessment of KPG performance Initial proposal of Project Kuwait was rejected by National Assembly Locked down in “data room” (Note: See measures taken in 1995 page 363)
  48. Regulation and Competition Regulation of oil sector and its story holds key to understanding why KPC has difficulties Begins with Law 19 of 1973 – 2 page piece of legislation Law intended to allow greater oversight and control (formerly regulated by Western companies) 1975 – a set of regulation appears – turns out were just a Arabic translation of some Canadian regulations KPC’s efforts to avoid government scrutiny were similar to those that BP and Gulf had made years ago
  49. Regulations In practice SPC and the ministry share regulatory oversight SPC as shareholder is more effective Civil Service Commission provides “back up regulation” No clear regulatory strategy and the result is a degree of chaos that inhibits operational effectiveness Government oversight is strongest is in procurement policy which involves State Audit Bureau (SAB) Some efforts increase referral to CTC to KD 1 million (Note: See page 367 – Sale of filling stations)
  50. Conclusions KPC has always a great deal of strategy Lacking in consistency in political and regulatory oversight to deliver on strategic goals KPC exposed to interest interference from a system dysfunctional Decision making in oil sector is complex, cumbersome, unpredictable and horribly bureaucratic An obvious reform would to be to separate roles of chairman of KPC and oil minister
  51. Conclusions KPC has some excellent managers, middle level management in KPC and its subsidiaries is exceptionally weak Root of personnel trouble is loss in 1991 of top talent and inability to derive a scheme to identify, train, and promote the most talented workforce Kuwait or KPC operates on a different legal biases The gridlock created by political structure
  52. The Future Prospects are not bright may get worse National Assembly expected to seek greater role in oil sector A certain solution would be a fundamental reform of the political system – no longer appointed by the emir Would reduce the emirs role to constitutional monarch Political system has effectively stalled entry of IOCs whose presence is essential – could become worse
  53. The Authors Say Thus KPC is hamstring – by Kuwait and by its own decisions – in managing its response to an array of serious challenges. If oil prices are low for several years – or production costs continue to rise – then Kuwaiti society will find itself accustomed to an expensive lifestyle that it is unable to afford.
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